Currently, the exchange between buyers and sellers of non-commodity items or products depends on a web of personal contacts, newsletters, and trade associations that despite best efforts of procurement and marketing organizations provide inconsistent and less than optimal results. For the specific case of managers of electrical generating facilities buying coal for steam and power production, this uncoordinated method works to the disadvantage of both buyers and sellers. There are hundreds of coal suppliers nationwide, and the characteristics of the product coals are rarely, if ever, the same. Also, coal is not a true commodity—subtle differences in the chemical composition of both organic and particularly inorganic components can have a dominant effect on the performance and operation of steam generation equipment, which influence power plant reliability and the wholesale power production cost. Further, the coal consumption requirements of large power stations usually cannot be satisfied by one source—several sources must be accessed, and each will provide coal of different composition. These differences in composition must be accounted for in assessing the desirability of any given coal product and negotiating a price.
The usual methodology for buyers and sellers interacting is initiated by the seller. In most commercial environments, the Seller assumes the obligation of finding customers and securing a purchase agreement, thus the actions and methodology are defined to suit the seller's needs.
Certain markets, however, are buyer-driven. Specifically, buyer-driven markets prevail in cases where large quantities of the material or item to be purchased are required for batch unit operations, and/or it is inconvenient for the buyer to store the required material or items. Examples of cases described by this scenario are procurement of coal, feedstock for paper production, and the refining petroleum products. The procurement of coal for power generation is the foremost example—the utility issues a request for proposal (RFP) for the purchase of a fixed quantity of coal, and within the RFP defines the acceptable range of chemical composition and physical characteristics. Bidders interested in responding to this RFP to supply the subject coal describe the characteristics of their proposed product and the price (either for “pickup” by the utility's transport provider at the mine, or delivered to the site) via sealed bid. The utility “shortlists” the suppliers to a total number that is usually between 3–6, based on price and cost factors the utility has developed that accounts for differences in coal composition. Several individual suppliers may pool their resources to assemble one bid, to provide either the requisite quantity of coal desired, or meet special composition requirements that can only be achieved by blending various coals. The “shortlist” of suppliers then engage into a competitive bidding process, with the utility selecting the least cost product.
The conventional transaction process, although providing the buyer with a competitive bidding mechanism, may not completely maximize market efficiency. Further, the conventional transaction process does not insure that the buyer has every opportunity to purchase the coals that are optimal for any given generating station. Specifically, some suppliers whose coal may be suitable for a power station only when as a constituent of a blend may not be visible to either the buyer, or to other sellers that may utilize the product in a blend. Further, the fact that coal cannot be treated as a true commodity complicates consideration of a broad array of candidate suppliers. As each coal source is unique, a significant amount of analysis is necessary to determine the appropriateness of each candidate coal for a given power station. Further, the “scheduled” nature of the market—the timed issuance of RFP documents for purchase contracts—may not support the most efficient allocation of resources. Specifically, several procurements scheduled for approximately the same time period will in essence “compete” with each other, driving up the price for buyers.